Investors say industry’s fundamentals remain strong.
By Brian Gormley
(WWW.WSJ.COM)–Initial public offerings by biotechnology companies are slowing after two record-setting years as the poor performance of some recent IPOs combined with economic and geopolitical uncertain-ties have cooled interest in the sector.
Seven biotech companies have gone public in the U.S. this year as of Feb. 22, compared with 21 as of the same date in 2021, according to data from Nasdaq, the exchange that hosted nearly all of those stock-market debuts.
Surging innovation and biotech’s role in combating the pandemic drew investors to the industry in 2021 and 2020. Last year, 111 biotechs went public in the U.S., topping the previous peak of 91 in 2020, according to Nasdaq.
Over the past year the SPDR S&P Biotech ETF, an equal-weighted index of biotech stocks, fell by about 44%, while the S&P 500 is up slightly. That, along with macroeconomic concerns, such as the prospect of rising interest rates and a potential Russian invasion of Ukraine, is giving IPO buyers pause, investors said.
“The industry was in for a rebalancing,” said Nina Kjellson, a general partner with venture firm Canaan Partners.
Investors have been inundated with biotech IPOs, and there haven’t been a significant number of standout clinical-trial successes recently, said Rahul Chaudhary, head of healthcare equity capital markets for investment bank SVB Securities LLC. With the shares of several biotechs trading down since they went public, investors don’t necessarily have to buy into IPOs when seeking attractive opportunities, he added.
“The sheer number of companies that came public made people stop and say, ‘Maybe we need to slow down the spigot,’” Mr. Chaudhary said.
The tightening IPO market hasn’t led to drastic changes in biotech venture-capital financings yet, investors said. U.S. biotech startups raised $29.66 billion in venture capital last year, up from $20.05 billion in 2020 and $12.55 billion in 2019, according to Silicon Valley Bank.
Additionally, U.S. healthcare venture capitalists secured $28.3 billion in 2021, compared with $16.8 billion the year before, according to SVB.
Because many biotech startups are well funded and venture capital remains abundant, biotechs have yet to feel a significant pinch, though that will change if the IPO slowdown persists well into this year, some investors said.
Ally Bridge Group has been advising startups not to rush toward IPOs because private capital is readily available, said Frank Yu, the firm’s founder, chief executive and chief investment officer. Ally invests in private and public healthcare companies.
Many industry fundamentals remain strong, investors and analysts said, citing continued innovation and reduced regulatory uncertainty because of the recent confirmation of Robert Califf as commissioner of the Food and Drug Administration.
Biotech IPOs will rebound as companies generate positive clinical trial data and broader market challenges subside, some observers added. The number of biotechs planning to go public in the next 12 to 18 months remains comparable to the number in recent years, said Jordan Saxe, head of healthcare listings for Nasdaq.
“The inventory is strong, the question is going to be on the demand side—how many end up getting out this year versus next year,” Mr. Saxe said.
Biotechs also shouldn’t fixate on IPOs, said Lee Cooper, a venture investor with Leaps by Bayer, the venture-capital arm of life-sciences company Bayer AG.
In biotech, IPOs should be thought of as one way of funding the development of a new medicine, he said.
“[An] IPO is a major financing event,” Mr. Cooper said. “But it is not the endgame for a biotech company.”